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Facts

QBE Insurance (Singapore) Pte Ltd (“QBE”) issued a multi-buyer TCI policy to Novita Trading Limited (“Novita”) (the “Policy”) pursuant to which it agreed to indemnify Novita in respect of non-payment arising out of its “sale” and “Shipment” of goods on deferred payment terms with named buyers. Marketlend Pty Ltd (“Marketlend”) financed Novita for these trades by way of credit facilities. These facilities were supported by a trust whose trustee, Australian Executor Trustees Limited (“AETL”), was a joint insured under the Policy. Marketlend and AETL commenced proceedings against QBE in relation to eight claims that AETL submitted under the Policy concerning purported trades conducted by Novita.

Held

Insured Debt not proven on a balance of probabilities

The Claimants were required to prove the existence of an Insured Debt on a balance of probabilities, which in the Court’s view required showing an actual physical sale and shipment of goods by Novita to its insured buyers; and was to be distinguished from a ‘paper’ trade or a fictitious trade. On the evidence, the Claimants were unable prove the existence of an Insured Debt in respect of the claims.

The Claimants relied on Lloyd’s vessel reports and IMB reports as evidence of Novita having conducted genuine trades. The Court however found that these reports only showed that physical goods were duly shipped on board various vessels and transported to various destination ports.

They did not however “even begin to show” that “Novita was itself involved in shipping those goods at the port of loading or otherwise involved as an intermediate buyer/seller in the purchase in or onward sale of the goods”. Further, the Court noted that the mere fact that Novita came into possession of copies of bills of lading was neither here nor there for showing that Novita’s alleged trades were genuine, particularly given the lack of evidence from Novita explaining its possession of the copy bills of lading. The court earlier noted that intermediate traders may obtain constructive possession of goods by the receipt of the original bills of lading rather than actual possession of goods.

The acknowledgements of debt from Novita’s alleged buyers to Marketlend were also inconclusive as to the genuineness of their trades with Novita, particularly since it was always possible that the individuals providing the acknowledgements were not honest people; and the fact that they did not give evidence meant that their credibility could not be assessed.

The Court also took note of a number of features of the sale contracts between Novita and its insured buyers which were inconsistent, based on expert evidence, with market practice for the relevant commodities. These included the absence of any shipment period or delivery date, the incorporation of inappropriate standard form contracts, the requirement of presentation of packing lists for bulk cargoes (which do not require packing lists) and the lack of detailed specifications of the agricultural commodities being transacted. Novita’s refusal to cooperate with the Claimants to support the Policy claims was further found to support QBE’s case that the alleged trades were not genuine, and the Court was prepared to draw an adverse inference from Novita’s refusal to give evidence or otherwise assist the Claimants at the trial that the trades were not genuine.

Finally, QBE had, through its own investigations, reconstructed the entire sales chain for goods under two of Novita’s alleged trades. The confirmations provided by the shipper to the receiver of the cargo and all intermediate parties showed that the underlying goods were traded to the exclusion of Novita or its alleged buyers.

On the totality of the evidence before it, the Court found that the Claimants had not proven the existence of genuine trades on a balance of probabilities. Indeed, the Court went further to state the “irresistible inference” on a balance of probabilities is that all of Novita’s trades were fictitious.

Failure to provide evidence of transmission of bills of lading and shipping documents for a trade as a condition precedent to liability

The insured’s observance of all the terms and conditions of the Policy was a condition precedent to any liability under the Policy; and these terms and conditions included (i) providing documents and information requested by QBE relating to (among other things) any transaction between the insured and its buyer, and (ii) the obligation to cooperate fully with the insurer in relation to investigation and handling of claims.

As part of investigating the Policy claims, QBE had requested for copies of correspondence concerning the transmission of invoices, bills of lading and shipping documents from Novita to its buyers. None of this information was however provided.

The court was of the view that it is “plain” that such cover correspondence would fall within the insured’s duty to provide documents and information to QBE and/or to cooperate with QBE in investigating and handling claims. This is consistent the Court’s view that on a plain reading, an ‘Insured Debt’ under the Policy, required an actual physical sale and shipment of goods by Novita to its insured buyers. A shipment of goods by a party to another ordinarily involves the transmission bills of lading and shipping documents, making it “plain” that the insured was required to provide these documents. The insureds’ failure to provide these documents therefore constituted a breach of conditions precedents under the Policy.

Material non-disclosure and misrepresentations

Finally, the Court found that the fact of any one or more of the Novita’s alleged trades was fictitious (a) was plainly material to the risk which a prudent underwriter would be willing to undertake; (b) that if that fact had been disclosed, QBE would never have accepted the risk. Not only was Novita’s failure to make such disclosure was a breach of a condition precedent to the right to claim under the Policy, but also, it entitled QBE to avoid the Policy on grounds of material non- disclosure. The fictitiousness of Novita’s alleged trades also meant that Novita’s pre-Policy representations to QBE which indicated that Novita was seeking cover for losses incurred in its physical trading of commodities were false. These further entitled QBE to avoid the Policy.

Assignment of policy without insurer’s consent entitles insurer to avoid liability

As part of its invoice financing, Novita had “assign[ed] and agreed to assign absolutely to Marketlend all of its” rights under any insurance policy in which it may from time to time have an interest. Novita however did not seek QBE’s prior written consent for this assignment as required under the terms of the Policy. Failure to obtain such consent expressly entitled QBE to avoid liability under the Policy. The Claimants conceded that if consent had not been provided, QBE would be entitled to avoid liability as against both Marketlend and AETL. The court’s finding that there was no evidence of QBE’s written consent to an assignment of the Policy to Marketlend was in the circumstances fatal to both Marketlend and AETL’s claims.

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This is a landmark decision for both the trade credit insurance business as well as the billion-dollar invoice financing market that heavily relies on trade credit insurance. Ultimately the risk of fictitious or paper trades remains prevalent and financiers should not assume or regard trade credit insurance as responding to fictitious trades. The use of copy of bills of lading to imitate a trade flow is a worrying trend but there are often other tell-tale signs of a trade flow not being genuine, including contracts that do not reflect market terms/practices.

In putting forward claims, an insured needs to be cognizant of its burden of satisfying the policy terms which in this case required a demonstration not only a sale of goods but also involvement in the actual physical shipment. As noted by the SICC, an intermediate trader may have constructive possession of the goods in the shipment by holding the original bills of lading even if it does not have actual possession of the goods.

There is much unhappy litigation between insurers and invoice financiers across the world arising from the collapse of traders that accessed financing through invoice financing programs. Such programs remain vulnerable to buyer collusion and impersonation and may invariably affect coverage under trade credit insurance.